Commercial Policy

What is Commercial Policy

Commercial policy is an umbrella term that describes the regulations and policies that dictate how companies and individuals in one country conduct commerce with companies and individuals in another country. Commercial policy is sometimes referred to as trade policy or international trade policy.

BREAKING DOWN Commercial Policy

Commercial policy is one of the most fundamental purposes of government. In the United States, the administration of commercial policy is a role the federal government has assumed since the country’s founding, with tariffs on imported goods being the main source of funding for the federal government from America’s beginning until the early twentieth century.

Tariffs, or taxes levied to the sale of foreign goods is a home country, is just one element of commercial policy. Other policies that fall under the heading of commercial policy include import quotas, export constraints, and restrictions against foreign-owned companies operating domestically. Another major element of commercial policy are government-provided subsidies to domestic industries that enable those companies to better compete with their counterparts abroad.

Commercial Policy in the United States

Commercial policy has been of utmost concern to American policy makers since before the founding of the United States. According to Dartmouth University economist Douglas Irwin, “U.S. trade policy has been directed toward achieving three principal objectives: raising revenue for the government by levying duties on imports, restricting imports to protect domestic producers from foreign competition, and concluding reciprocity agreements to reduce trade barriers and expand exports.”

Irwin explains that these goals are sometimes in conflict with each other. It is, for instance, impossible to both raise tariffs to protect domestic industries while pursuing a policy of reciprocal lowering of trade barriers in an effort to increase exports. Though there have always been constituencies within the United States that have advocated for one form or another of commercial policy, it is generally the case that for the first third of the country’s history, commercial policy was directed towards raising revenue. From the Civil War through the Great Depression, commercial policy was largely directed at protecting domestic manufacturing industries, and in the decades following World War Two, there was a bipartisan consensus toward reciprocal lowering of tariffs in an effort to open up foreign markets to American producers.

Since the election of Donald Trump to the American presidency in November of 2016, U.S. commercial policy has shifted once again, with the White House attempting to change the purpose of commercial policy to protecting domestic industry. The effects of this new policy effort, however, are uncertain. As the world economy has become more globalized, many companies and supply chains are distributed across borders, making the effects of new and higher tariffs difficult to predict.

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Related Terms

A quota is a government-imposed trade restriction limiting the number or value of goods a country can import or export during a particular period. The placement of quotas may limit the physical number of a product or may set a monetary value product limit.

Free trade is a policy to eliminate discrimination against imports and exports. Free trade is the unrestricted purchase and sale of goods and services between countries without constraints such as tariffs, duties, and quotas.